Diversify and ride out bad times

STOCK markets around the world are going through a turbulent time as the world tries to sort out its many financial problems.

Naturally, this has led to a spate of emails from readers asking whether they should cash in all their share-based investments and place the money in the bank while they wait for the upturn.

While this strategy may give peace of mind in the short term, the problem is that nobody is able to consistently forecast what markets will do in the future.

To make it more difficult it is also a fact of life that markets tend to bounce back very quickly and unexpectedly when they do.

I believe a better option is to agree on a diversified portfolio and decide how much you wish to keep in each of the three asset classes – cash, property and shares.

When you do this, you should keep in mind that property and shares should never be bought unless you have at least a seven to ten year time frame in mind. This will give you time to ride out the inevitable downturns.

I understand the gloomy headlines are depressing, but history shows that it is common for the stock market to have up to four negative years in every 10 – this means there are at least six good ones every decade.

Whenever I think about shares, I am reminded of these words from a new investor: “I bought shares for my old age and they are certainly effective – I’ve only owned them a week and I feel 10 years older already”.

Yes, owning shares can be scary at times, but that is the price you pay for the benefits that shares bring. Just remember to hang in when the inevitable falls occur, and don’t lose your nerve and sell out at the wrong time.

Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is noel.whittaker@whittakermacnaught.com.au.